How really do liquidations work(Fundamental Idea)

[jaskara-n]

Liquidations in decentralized finance (DeFi) occur when a user's Vault or loan position becomes too risky due to insufficient collateral. In the case of Vaults on platforms like RupioDao, if the collateral ratio falls below the liquidation ratio, the system initiates a liquidation process to recover the debt.

During liquidation, third-party participants (known as liquidators) can participate in an auction. These liquidators cover the outstanding debt and, in return, receive the collateral from the Vault at a discounted price, thus preventing undercollateralization.